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5 limited integration best practices from serial acquirers

July 24, 2023

Market forces are driving companies to change long-accustomed approaches to deals and, in many circumstances, choose limited (or partial) integration instead of full integration.
Mergers and Acquisitions

Market forces are driving companies to change long-accustomed approaches to deals and, in many circumstances, choose limited (or partial) integration instead of full integration. In fact, 61% of highly experienced serial acquirers in our closed-group HR M&A roundtable pursue limited integration for at least some deals. 

Why the greater focus on limited integration?

Going back ten years and longer, large multinational companies predominantly followed a dominant player absorption playbook, when the acquired company’s operations are integrated into (a.k.a. swallowed by) the acquiring company’s structure. These deals were (and to a certain extent, still are) about scale, growing bigger as quickly as possible and driving cost synergies. In these deals, HR due diligence and integration focus primarily on the costs, potential liabilities, timing, and risks of fully assimilating the acquired company’s employees into the buyer’s plans and programs. Given the disruption to employees, there would typically be a heavy emphasis on change management tactics and employee communications. Companies often choose limited integration over dominant player absorption when the transaction is about scope – typically a move into new products and services that may or may not be closely adjacent to the buyer’s historic offerings – and revenue synergies (from cross-selling, for example) may be more important than cost synergies. 

Why limited integration is often the best option

Here’s why many of our clients choose limited integration for some types of deals:

To preserve and protect the acquired company’s “special sauce.” With a limited integration strategy, you preserve the acquired company’s autonomy, unique brand and culture while (at least partially) achieving the desired financial benefits. Minimizing changes while maintaining the acquired company’s culture may be essential to preserve employee and customer loyalty. For example, consider the possible ramifications if a large tech company with a conventional hierarchy purchases a start-up that has rapidly built a flat-hierarchy culture and tries to force immediate compliance with all of its policies and procedures.

To postpone disruption for acquired employees. A limited integration strategy allows for a more gradual integration process. By focusing only on critical areas of integration, choosing from HR systems, financial systems, legal compliance, and other areas, you can minimize the impact on employees regarding integration tasks that may not be needed immediately on day one post-close. Additionally, integration decisions that can be delayed will likely be more robust if they are based on the receipt of more and better data.

To keep options open. And consider that a limited integration strategy provides greater flexibility for potential future strategic decisions. By preserving the acquired company on at least a semi-standalone basis, you can keep multiple options in play and pivot as needed based on market conditions and business performance.

Understanding and acceptance of “non-negotiables” are critical to successful limited integration 

Companies that do limited integration successfully take the time to identify, articulate and communicate their HR guiding principles at the outset. It is essential to discuss with buyer leadership and other internal stakeholders what aspects of the deal are non-negotiable and how they will play out in practice. In some ways, it’s more complicated than in fully integrated deals, where acquired companies are assimilated into the buyer’s organization structure and operating model, and must adopt the buyer’s systems, policies and procedures almost immediately.

For limited integration deals, here are some of the potential HR-related non-negotiables:

  • HR statutory & regulatory compliance (which is typically mandatory and never up for discussion)
  • Sales compensation plans
  • HR learning & development
  • DEI programs and metrics
  • HR governance and decision-making authority
  • Executive compensation/equity plans
  • HR information systems
  • HR policies
  • Compensation planning
  • Talent management

 Although the exact number and nature of the non-negotiables will vary from company to company, the key to success is to keep requirements specific and few. It is better to have the acquired company change its ways to comply with half a dozen new requirements than to overwhelm management and employees with scores and scores of seemingly arbitrary diktats. This is especially true when you consider other functions apart from HR (e.g., Finance, IT, Legal) will also have their lists of “must-haves.”  

5 limited integration lessons from serial acquirers

Our roundtable members advised the following “musts” for a successful limited integration:

  1. Secure internal agreement and buy-in on non-negotiables. This includes working closely with the deal team and receiving business leadership to establish clear guidelines and expectations before entering negotiations. Establishing a shared understanding upfront can avoid potential misunderstandings and miscommunications.
  2. Collaborate with target leadership to understand non-negotiables' impact on those factors that drive value for the target business. Non-negotiables can have unintended consequences if not carefully managed. 
  3. Validate the proposed operating model with target leadership as early as possible while acknowledging that it might need to be refined. Engaging with target leadership early on allows for identifying potential misalignment areas and the opportunity to refine the operating model.
  4. Establish regular communication with the target. Consider establishing regular check-ins and touchpoints to keep all parties informed and engaged. This will also help identify and address potential issues before they escalate.

Ensure adequate change management for acquired employees (and potentially, current employees) through regular employee communications and listening mechanisms (e.g., FAQs, town halls, pulse surveys, virtual focus groups). Proactively managing the change process can help ease the transition for acquired employees and maintain productivity levels. 

Deal structure decisions are nuanced and complex. Limited integrations also have their downsides. If you acquire a company and keep it at arm's length after Close, you're not effectively capturing the synergies that were presumably the whole point of the deal. Acquired employee resistance to future change may become more entrenched the longer the business is allowed to operate “just like they always did.” Nevertheless, limited integration may be the best option when a company needs to go into new ventures or rapidly assimilate new areas of technology expertise to stay competitive and deliver required returns to shareholders. 

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